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5 Types of Demand Risk

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Demand risk is the potential for a loss due to a gap between forecast and actual demand. It is common for capital investments, marketing, sales and supply chain decisions to be based on demand forecasts. When these forecasts are inaccurate it can result in losses or suboptimal performance. The following are common types of demand risk.

Demand Shortfall

Demand that falls short of a forecast. This often occurs with new products as it is possible for a product launch to generate no demand whatsoever.

Latent Demand

A product or service that is in demand but customer's can't obtain it. This can occur due to price and distribution issues. For example, a product that is too expensive for its target market or is unavailable where they shop.

Seasonal Demand

Demand that rises and falls sharply along seasonal patterns. For example, a fashion brand with a popular Spring/Summer line that has far less demand for its Fall/Winter products each year. This can occur if the brand is associated with a summer activity such as surfing.

Excess Demand

Excess demand is when demand exceeds supply. Many firms aim for excess demand as it tends to be good for brand image and pricing. As such, excess demand is typically a good thing if you're selling. Where excess demand is a risk is if you're buying. For example, excess demand can make it difficult to secure parts, materials and inventory.

Demand Volatility

Demand that rises extremely fast and then suddenly collapses. This can cause a firm to invest in expensive capacity expansions only to see demand collapse and its supply chain flushed with excess inventory.
Overview: Demand Risk
The potential for a loss due to a gap between forecast and actual demand.
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